Clause Allowing Unilateral Appointment Of Arbitrator Does Not Invalidate Arbitration Agreement: Calcutta High Court

The Calcutta High Court has held in a dispute between a borrower and IndusInd Bank that even if an arbitration clause permits unilateral appointment of an arbitrator by one party, such a condition would invalidate only the appointment procedure and not the arbitration agreement itself.

In a judgment dated March 23, 2026, Justice Om Narayan Rai upheld the referral of the dispute to arbitration while affirming an order of the City Civil Court, Calcutta, which had stayed a civil suit filed by borrower Srikanta Patra and referred the parties to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996.

“The petitioner's contention that the arbitration clause is invalid since the same provides for unilateral appointment of arbitrator by the lender does not appeal. In the considered view of this Court, such a condition would render the unilateral process of appointment of arbitrator invalid but not the arbitration agreement itself.”

The dispute arose after Srikanta Patra obtained a credit facility from IndusInd Bank Ltd. for the purchase of a goods carrier. Due to financial recession and business losses, he defaulted on three installments, following which the bank repossessed the vehicle, which he alleged was done forcibly and illegally.

Patra filed a suit before the City Civil Court seeking a declaration of ownership over the vehicle and a permanent injunction against the bank. He alleged that his signatures had been obtained on blank papers, unfilled printed forms, and printed papers for the purpose of granting financial assistance and that nothing regarding the loan amount, rate of interest, amount repayable, and period of repayment had been communicated to him.

The bank entered appearance and filed an application under Section 5 read with Section 8 of the Arbitration and Conciliation Act, 1996, relying on Clause 11 of the loan agreement containing an arbitration clause.

By an order dated December 3, 2025, the City Civil Court stayed the suit and referred the parties to arbitration.

Patra challenged the order before the High Court by filing a revisional application, contending that the trial court erred in referring the dispute to arbitration without first coming to a prima facie finding that an arbitration clause existed. He also argued that the clause was invalid because it permitted unilateral appointment of the arbitrator and that the vehicle had been repossessed by force.

IndusInd Bank submitted that the learned trial court committed no error in referring the parties to arbitration in terms of the arbitration clause contained in the loan agreement. It further argued that if the agreement itself permits repossession of the financed vehicle, such repossession cannot be said to be illegal and that bifurcation of the subject-matter between civil court and arbitral tribunal would defeat the purpose of speedy justice.

Justice Rai reiterated that the scope of examination at the stage of Section 8 is limited to a prima facie determination of the existence of an arbitration agreement.

“Section 8 of the 1996 Act, which reads in mandatory terms, leaves no option to the Court to but to refer the parties to arbitration if there is an arbitration clause in the agreement.”

The court observed that once a certified copy of the agreement containing an arbitration clause is produced, the trial court is only required to be prima facie satisfied about its existence.

“Apart from mere pleadings there is nothing on record to suggest that the arbitration agreement was invalid.”

Rejecting the borrower's challenge to the unilateral appointment clause, the Court held that such a condition does not extinguish the arbitration agreement itself.

“In the considered view of this Court, such a condition would render the unilateral process of appointment of arbitrator invalid but not the arbitration agreement itself.”

On the issue of repossession, the court held that the borrower was not left without remedy and that such disputes can be raised before the arbitral forum.

“In any case, the legality of repossession of the vehicle by the financier can always be made the subject matter before the arbitrator or even in proceedings under Section 9 of the 1996 Act for the purpose of interim orders. The petitioner has thus not been left remediless.”

Holding that the trial court had correctly applied the statutory scheme, the High Court declined to interfere with the order dated December 3, 2025, and dismissed the revisional application.

The court also clarified that the borrower remains free to approach the bank for settlement or restructuring of the loan account in accordance with law

For Petitioner (Srikanta Patra): Advocates Rajib Ray.

For Respondent (IndusInd Bank Ltd.): Advocates Soni Ojha, Sambrita B. Chatterjee.